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New mortgage rules, in effect today, will make it hard on first-time buyers

Last Updated Oct 17, 2016 at 7:34 am PDT

(Courtesy iStock)
Summary

New regulations will involve a stress test for all insured mortgage applications

Ottawa is taking the steps to try and cool hot housing markets, specifically in Vancouver and Toronto

OTTAWA, ON. (NEWS 1130) – New federal rules that will cut into the purchasing power of some first-time home buyers take effect today and they could make things tougher for those folks to get into the market.

 

The rules involve a stress test for all insured mortgage applications to ensure the borrower can still service their loan in the event interest rates rise or their personal financial situation changes. Until now, stress tests were not required for fixed-rate mortgages longer than five years.

The federal government is making the change to try to stabilize the country’s housing markets, particularly in Vancouver and Toronto where prices have skyrocketed. Canadian mortgage brokers reported a flurry of borrowing last week as home buyers tried to get in under the wire.

 

But not everyone thinks these new rules will affect the way people purchase a single detached home because those are generally too expensive to get a mortgage. “Regulations and restrictions that the federal government is introducing on mortgages insurance will probably bite at the lower-end,” explains UBC’s Tsur Sommerville who goes on to explain what that lower end is. “Folks looking to buy condos or townhouses who have low down payments are going to be pressed in terms of how much they can borrow and that’s likely to dampen demand, particularly at the lower end of the market.”

You need the insurance if your down payment is less than 20 per cent but now, in order to get that, you’ll have to show you can handle the financial impact if your rate goes up. “And so that creates problems in high-priced markets where people are trying to borrow every dollar they can just to get into the market.”

Like Vancouver. “The federal government is thinking about this in a macro-level in terms of the risk in the economy and the exposure to mortgage risk, both for lenders and also for households. They’re trying to make sure that essentially households borrow an amount that if interest rates go up, they can still handle [it].”

Sommerville adds the changes shouldn’t have any effect on foreign buyers. Ottawa is also making changes to end a long-standing exemption allowing non-residents to buy homes and later claim a tax exemption on the sales of those properties. That exemption will only be available to those who live in Canada in the same year they buy the property.

And effective November 30th of this year, mortgages loans that lenders insure using portfolio insurance and other low-loan-to-value ratio mortgage insurance, will need to meet loan eligibility criteria that previously applied to highly-leveraged insured mortgages.